Here’s how the S&P 500 could get to 5,000

New York Stock Exchange © Getty Images
Warren Buffett described a bet on the S&P 500 as a bet on American enterprise

I’ve been thinking recently about the stockmarket, specifically the S&P 500 index.

I’m getting so many conflicting opinions that I want to take a step back and consider some of the longer-term possibilities.

Are we about to have a massive correction? A minor correction? Do we range trade?

And what about the possibility that this bull market just keeps on going?

This feels like the late stages of a bull market. But…

The S&P 500 or, to give it its full title, the Standard & Poor’s 500 Index, is an index of 500 of the largest publicly traded companies in America. It pretty much represents the US stockmarket, and is almost certainly the most commonly followed equity index – not just in the US, but worldwide.

Comprising companies from just about every sector of the economy, it also acts as a barometer of the state of the American economy. None other than Warren Buffett has described a bet on the S&P 500 as a bet on American enterprise.

And the truth is that there are far worse bets in the world. Is America going to do well? Probably. Is America a good place to do business? For the most part, yes. Are Americans good to do business with? For the most part, yes, I’ll say.

Is America advancing and improving, innovating and inventing? Hell, yes! Humans are doing that pretty much everywhere, and America leads the pack.

Below, courtesy of Nick Laird, is a long-term chart of the S&P 500 since 1920. Its inexorable rise reflects all the growth, prosperity and progress that the US has seen over the last 100 years.

Nick has drawn a green band around the price and, most of the time, the S&P trades within the range of that band.

S&P 500 chart


Looked at from a distance, all one ever need to do, it seems, is buy America and walk away.

Not so easy.

If you bought the S&P 500 in 1929, it wasn’t until the 1950s that you were in the black. If you bought in 1932, of course, you pretty much never had to look back.

If you bought the S&P 500 in the 1950s or 60s, you saw pretty much nothing but gain. But then the market went nowhere in the 70s.

The 80s and 90s look like pure bull market – but say that to someone who was trading in 1987. Yet even that momentous crash looks like a blip in retrospect.

The 2000s, too, was another frustrating decade, but if you bought heavily in 2009, let’s just say, you can buy the drinks.

I’ve been making the argument for a while now that this bull market in stocks is mature. It’s more than eight years old now. That’s unusually long. The end may not be nigh, but it is in sight – and if that’s the case, we should be looking towards so-called late-cycle assets.

I’m reading a number of other market commentators, far brighter than me, who have been making similar prognostications – Jim Puplava over at Financial Sense, and Cam Hui at Humble Student of the Markets, for example.

There are also bears everywhere. These include newsletter nutcases who declare that the Dow is going back to 1,000 (equivalent to the S&P 500 at around 100 – its current price is 2,475) to value investors making sensible, rational arguments – the likes of Albert Edwards at Societe Generale and Mike Shedlock at MishTalk – that valuations are extreme and that this bull market will not end well.

There is also the usual mix of sensible bulls and the naïve and over-leveraged, who are convinced this market is headed much higher.

I think I understand most of the arguments and the one I find most persuasive is, as I’ve suggested, that we are late in the cycle, and that we go a bit higher before a nasty correction.

But before we get too comfortable in our bearishness – let me just put another idea into your head.

What if we’ve just been through a repeat of the 1930s?

In terms of stockmarket performance, the 2000s was another decade like the 1930s and the 1970s – decades characterised by crashes and volatility. Such decades seem to come around every 30-40 years, once a generation, in other words – enough to remind participants that nothing goes up in a straight line, despite the incredible progress human beings are making, especially American ones.

In simplistic terms, if the 2000s were a repeat of the 1930s and the 1970s, then shouldn’t this decade be equivalent to the 1940s or 1980s, perhaps? In other words, we can expect another ten to 15 years of strong market before the next major downturn.

With everything that’s going on politically, it’s hard to believe such a thing is possible, but from a trend point of view it certainly is.

Let’s consider once again that long-term chart of the S&P 500. Nick Laird has drawn a green prediction band around the price. For 75% of the time, the S&P has stayed within that band. There are periods when it has slid below and when it has slid above, but for the bulk of the time it has remained within.

You could expand that band only a fraction so that the price only escapes it at times of real extremity – the 1929 peak, the 1932 crash low and so on.

If we are following a similar trajectory to the 1940s or the 1980s, then the current trajectory is destined to end around 2030. We might get some kind of blow-off top beyond that green band, as in 1929 and 2000, or a more sober version such as we saw in the late 1960s.

In any case case we’d be looking at a bull market peak perhaps even beyond the 5,000 mark.

The arrows I’ve drawn on the chart show three possibilities, all within that green band.

S&P 500 chart

I’m not saying the S&P 500 is going to go to 5,000. I am, however, saying that it could quite easily go to 5,000 by 2030 and, if it did, then in historical terms, it would not be such an absurd aberration. So don’t rule out the possibility.

By the way, before you get too bullish, it’s also worth noting that if you buy this idea that we are in a similar scenario (stockmarket-price-wise) to the 1940s and the 1980s – both 1947 and 1987 were horrible years for the stockmarket.

So maybe don’t go in all guns blazing.

  • Tawse

    Quite a few people I know think that we are going to see a 6 month melt-up in stocks like in 1999/2000 Dominic.

    The people I know who do charts, waves, cycles and wiggly lines are expecting up to a 10% correction sometime around now till September. Once that is out of the way they argue that we then get a 6 month melt-up. After which, then comes the huge crash.

    I know – all crystal ball stuff.

    Looking back over the past 18 months it looks and feels like the melt-up has already happened. But if the melt-up is right then those crazy semi-conductors and FANG stocks could be going a heck of a lot higher.

    As per usual, having now commented on the headline I will go and read the article 🙂 If only they had taught me to read English Lit like this back in school. Read the title and the last page first!

  • Phil Broome

    so from here the market could go up, down or sideways…..interesting.

    • alexblackka

      “so from here the market could go up, down or sideways…”

      Yep pointless article! Did you know that Dominic is – oddly – also a comedian?

      I wonder what Jesse Livermore would be doing in these times…

    • rory

      …or any variation of all three!

  • How much can we really rely on charts? I like the long term trend chart with the green band, but that’s all drawn with hindsight and wouldn’t have been predicted 100 years ago. Our low interest rate, high QE paradigm has changed the dynamics as has the value extraction mentality since the 1980s and the presence of emerging markets into the global investment universe. Perhaps shares aren’t the right investment any more? Maybe we need to look to private equity?

    Too many variables to make any convincing predictions on the S&P when taken in isolation. I think Dominic’s article straddles the line between investing and gambling. Those wanting a “punt” might like to consider the predictions but those looking for longer term, relevant investments would be advised to tread more carefully.

  • anyoldirony

    Frisby and Stepek have to produce an eyecatching article at least once a week. Give them a break!

  • Peter Cooper

    Chasing the end of a trend is not a good investment.